FINRA has fined Apex Clearing Corporation $3.2 million for violations related to its fully paid securities lending program. This is the first time FINRA has charged a firm with violating FINRA Rule 4330, which establishes permissible use of customers’ securities to ensure customer protection.
Apex operated a fully paid securities lending program for introducing firms, which in turn offered their customers the opportunity to participate. FINRA previously ordered four introducing firms whose customers participated in Apex’s program to pay a combined $2.6 million, including over $1 million in restitution to harmed customers, for supervisory and advertising violations related to the program. But it was Apex that entered into the lending agreements with customers and borrowed customer securities. These matters originated from a FINRA examination of firms offering fully paid securities lending to retail customers.
“Member firms must have reasonable grounds to believe that a fully paid securities lending program is appropriate for customers who participate. It is unreasonable to expect a customer to take on risks and the potential financial consequences of securities lending with no financial upside,” said Bill St. Louis, Executive Vice President and Head of Enforcement at FINRA. “In addition to obtaining restitution for harmed investors from the introducing firms, we must hold accountable the clearing firm that designed, facilitated and benefitted from this program.”
Fully paid securities lending is a practice through which a broker-dealer borrows a customer’s fully paid or excess margin securities and typically lends them to a third party in exchange for a daily borrowing fee. If a customer chooses to enroll in a fully paid lending program, the clearing firm determines which securities to borrow, when, and on what terms. The daily borrowing fee that the clearing firm collects is generally shared among the clearing firm, the introducing broker-dealer and the customer who owns the borrowed security. In this case, customers were exposed to risks but did not receive any of the borrowing fee. Those risks included potentially higher taxation for payments received in lieu of dividends, loss of Securities Investor Protection Corporation protection on the securities for the duration of the loan and loss of voting rights.
FINRA Rule 4330 (Customer Protection — Permissible Use of Customers' Securities) requires members firms that borrow customers’ securities to have reasonable grounds to believe the loans are appropriate for the customers and to provide customers with specific notices and disclosures in writing. Apex failed on all of those counts—it lacked reasonable grounds to think the program was appropriate for participating customers who did not receive a loan fee for their loans, distributed documents that misrepresented that customers would receive compensation (they did not) and failed to provide certain customers with required written disclosures.
From January 2019 through June 2023, Apex entered into securities loans with certain introduced customers without having reasonable grounds to believe that the loans were appropriate for those customers because those customers did not receive a loan fee for lending their shares.
In addition, Apex also violated FINRA Rules 2210 (Communications with the Public), 3110 (Supervision) and 2010 (Standards of Commercial Honor and Principles of Trade). From March 2021 through April 2023, the firm failed to provide many customers enrolled in its fully paid securities lending program with all of the written disclosures regarding the customers’ rights with respect to the loaned securities and the risks and financial impacts associated with the customers’ loans of securities required under FINRA Rule 4330.
From January 2019 through June 2023, Apex distributed to certain of its introducing broker-dealers documents that were sent to more than 5 million retail investors containing misrepresentations about the compensation that those investors would receive for loans under the fully paid securities lending program. Four of those introducing broker-dealers enrolled approximately 5 million investors, approximately 17 percent of which had securities borrowed by Apex. Finally, since at least January 2019, Apex has failed to establish, maintain and enforce a supervisory system, including written supervisory procedures, for its program reasonably designed to achieve compliance with FINRA Rule 4330.
In settling this matter, Apex consented to the entry of FINRA’s findings without admitting or denying the charges. The firm also agreed to certify that it has remediated the issues identified by FINRA.
FINRA makes available disciplinary actions and other information on its Disciplinary Actions Online database. In addition, FINRA publishes on its Monthly Disciplinary Actions page a summary of disciplinary actions against firms and individuals for violations of FINRA rules; federal securities laws, rules and regulations; and the rules of the Municipal Securities Rulemaking Board.
